February 6, 2018
Yesterday was amusing. The meat with mouths on the so-called financial networks were crying, “how could this have happened.” Funny thing, that. They don’t raise the slightest doubt of conviction when the Dow soars 2,676 points in less than two months – 23,940 on November 29th to 26,616 on January 26th. But when the market takes back that move in 6 trading days it’s a problem that Congress and the Fed need to “fix.”
The stock market’s small accident last Friday was a warning signal. But, in the context of the move made by the Dow since it bottomed on March 5, 2009, barely registers on the radar screen:
I saw this table on Twitter and thought it was a good summary of the extreme bullishness that I’ve been documenting for the past few issues (Short Seller’s Journal):
The old adage states that “they don’t ring a bell at the top.” But that table above seems to have nine different “bells ringing.” Note: “NAAIM” is the National Association of Active Investment Managers (Note, I know MMF is money market funds but I’m not sure what the rest of the metric represents other than its some measure of investor portfolio cash vs stock holdings). As you can see, every indicator that measures relative bull/bear sentiment is at a bullish extreme.
A record one-day inflow north of $500 million was tossed by retail investors into one of the inverse VIX ETNs. Hard to imagine a louder “fire alarm” ringing than that one. The Dow shed 1,095 points from last Friday’s close – 4.1%. The first big chunk down was Tuesday, when it lost 363 points. It also lost 177 points on Monday. After two small days of gains, ostensibly in support of Trump’s State of the Union speech, the Dow plunged 665 points on Friday.
Monday was obviously the type of market behavior about which many, including this blog, have been, have been warning. Who could’ve seen that coming?
Even more interesting than the action in the stock market was the action in the bond market. Historically, other than in times of extreme market turmoil, when the stock market sells off with force, the funds flow into the Treasury bond market. Bond prices rise and yields fall. But this week the 10-year Treasury lost roughly 1.4 points, which translated into a 15 basis point jump in its yield to 2.84% The long bond closed over 3%. Even short term Treasury rates rose. It will be interesting to see if this trend continues. It is exceptionally bearish for the housing market.
Now, self-entitled “exceptionalist” Americans will be begging their Congressmen to “do something” while Congressmen will be grand-standing for the Fed to “do something.” But the “something” that was done from 2008 to 2015 is wearing off. If the Fed is going to do God’s work and save the universe from natural market forces, it will have to print even more money than last time around. That type of “doing something” will annihilate the dollar.
The immediate problem will be retail and hedge fund margin calls. If we don’t hear about ETFs and hedge funds blowing up after what happened yesterday, it means the PPT (NY Fed + the Treasury’s Working Group on Financial Markets – the “PPT” – which both have offices in the same building in lower Manhattan) has monetized and covered up those financial road-side bombs.
Hedge fund net exposure to equities had reached a record by early January. “Risk appetite” by mid-January had reached an all-time high. Margin debt and “investor credit” began hitting all-time highs and all-time lows, respectively, in January. “Investor credit” is, essentially, the amount of cash an investor can withdraw from a stock account aftersubtracting margin debt. This metric was north of negative $500 billion.
But, who could’ve seen this coming?